International Cartel Defence - Strategic Choices for Companies

Competition 2006/07 Volume 1 Cross-border

International cartel defence - strategic choices for companies

Karen Silverman and Andreas Weitbrecht, Latham & Watkins LLP

www.practicallaw.com/2-205-5400

Cartel activity is unlawful in over 100 jurisdictions worldwide, RISKS AND CONSIDERATIONS TO BE ADDRESSED and the sanctions for violating the cartel laws are severe, rang- ing from substantial criminal fi nes, penalties and imprisonment The risks and considerations to be considered include, of course, (in the US), to quasi-criminal and fi nancial penalties levied on the traditional concerns that arise from competition laws, which companies and individuals. Cartel prosecutions can take place si- may confl ict with one another depending on differing jurisdiction- multaneously in any jurisdiction in which the cartel is suspected al requirements. They also include, however, wider issues aris- of having operated, resulting in concurrent investigations around ing under securities, corporate governance, trade secrets, foreign the world. Moreover, there are also civil risks, as direct, and trade, government contracting and employment laws, and other sometimes indirect, purchasers may seek to recover single (or in commercial considerations, such as public, investor, supplier and Cross-border the US treble) civil damages. And regardless of the outcome, sim- customer relations and the diffi culties of managing a company ply having to investigate and defend against such a claim diverts that is threatened with charges of illegal conduct. management time and legal costs from the productive work of the Primary competition law risks company and risks public disclosure of corporate conduct. In all respects, participation in an international cartel can have severe The principal risks that face companies accused of participating adverse consequences for a company. in a cartel are well known: Representing companies facing a cartel investigation is a diffi - Prosecution by the competition authorities. In some juris- cult and delicate task for the company’s lawyers and its outside dictions, most notably the US, but also the UK and Canada, counsel. A company that discovers unlawful cartel activity in- governments can prosecute individuals and companies ternally (through an employee, customer complaint or any other accused of participating in a cartel as having committed means) initially must consider how to investigate and then con- a criminal offence, and often individuals face substantial sider whether, when and where to seek amnesty or leniency from criminal fi nes and/or jail time. In other jurisdictions, such prosecution by law enforcement agencies around the world. On as the EU, companies and individuals can be subject to the other hand, a company that discovers from external sources quasi-criminal sanctions. Debarment from government that it has become the subject of an ongoing investigation has a contracts, usually for a limited period of time, is another different set of issues to consider. This chapter focuses on the possible sanction. latter, and in particular: Cartel sanctions purposely have become more severe, with Outlines the risks and issues to address. the US routinely seeking jail terms for the key management personnel responsible for a company’s illegal activities, Describes the decision-making process. and fi nes in the US and EU in the hundreds of millions, calculated as multiples of the gain received or loss suffered Looks at the available strategies. as a result of the conduct, or as percentages of a company’s entire turnover (whether or not associated with the alleged Describes the considerations that ultimately will determine the appropriate strategy. cartel activity).

In Europe, a company’s ﬁ rst indication of an investigation usually The severity of these sanctions sometimes can be sub- will be a dawn raid by the European Commission. In the US, it stantially mitigated, if a company admits its role in the might be a range of events, including receiving a notice from the cartel and provides full evidence against itself and the US Department of Justice that it has opened a criminal investiga- other participants. The terms and requirements of such tion, receiving a Grand Jury subpoena, an unannounced visit at mitigation or leniency arrangements differ according to the the company or an employee’s home with a search warrant or the jurisdiction, the timing of the company’s co-operation and corporate disclosure of an investigation by one of the company’s the company’s role in directing (or not) the illegal conduct. competitors, suppliers or customers in a public securities ﬁ ling These differences must be managed carefully, and across or otherwise. jurisdictions, by legal advisers.

This chapter focuses on the US and the EU enforcement regimes. Private damage suits. The second primary risk is private However, in practice, it also is critical to consider the laws of competition enforcement, which has, for a long time, been any other jurisdictions where cartel activity is alleged to have oc- limited almost exclusively to the US. Currently, numerous curred or had an effect. other jurisdictions also are in the process of strengthening their private competition enforcement mechanisms.

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© This chapter was first published in the PLC Cross-border Competition Handbook 2006/07 Volume 1 and is reproduced with the permission of the publisher, Practical Law Company. For further information or to obtain copies please contact [email protected], or visit www.practicallaw.com/competitionhandbook. Cross-border Competition 2006/07 Volume 1

Nevertheless, private enforcement in the US will continue Public and investor relations issues. The company’s rela- to represent by far the largest private risk, because of tions with the public, with capital markets and investors, as exposure to treble damages and other instruments of US well as relations with customers, suppliers and others, will procedural law, including class actions, attorneys’ fees and need to be considered and addressed in the process. extensive pre-trial discovery (that may be used in other jurisdictions as well). Despite the increase in fi nes imposed Employment, trade secrets, trade and government contract- by the public authorities, therefore, private damage suits, ing. In any particular jurisdiction, the local regulations especially if brought in the US, continue to have at least on these subjects may affect the company’s options in equally severe fi nancial consequences for businesses. defending a cartel investigation or proceeding. For example, there may be considerations as to whether it is necessary to It is important to consider that a company admitting to liability reprimand an employee, or whether it is unlawful to do so. in order to reduce its exposure to criminal fi nes may nonetheless The answer to such questions may differ by jurisdiction and fi nd itself subject to substantial civil penalties based on those companies will need to reconcile these tensions carefully. same admissions. The US has recently modifi ed the law to mod- estly protect companies that admit unlawful conduct and obtain Deciding on the best strategy is a complicated task, as it requires amnesty from prosecution, so that they face only single damages, balancing a number of confl icting considerations. not treble damages in the civil proceedings. That modifi cation is a relatively new development however, so the precise terms of its operation are quite uncertain, especially as it relates to compa- THE PROCESS – BEST PRACTICES nies that co-operate but are not the fi rst to approach the agencies Few companies are accustomed to dealing with the exceptional with an amnesty or leniency petition. situation of a cartel investigation. Even though time is of the es- sence, a company learning it is subject to an investigation must It is evident, despite this development, that there is a fundamen- ensure that the process is properly organised, and has appro- tal tension between the best defence in enforcement proceedings, priate supervision, includes an internal investigation, deals with which today often means full co-operation with the authorities (in- confl icts of interest, is co-ordinated across all jurisdictions and cluding admissions and the production of incriminating evidence), disciplines and does all of this as quickly as is reasonably pos- and the best defence in civil damage suits, where the company’s sible.

Cross-border position can be negatively affected by any admission or additional evidence introduced in the public enforcement proceedings. Establish appropriate supervision of the process

Secondary legal and non-legal issues Recent cartel prosecutions have involved senior management of companies, and there are famous examples of the top executives Legal and non-legal issues arising outside competition law can becoming the target of investigations. As a result, a company directly or indirectly infl uence the strategic choices of the com- may not be able to, at the outset, exclude the possibility that pany and should be addressed when implementing a defence senior management had a role in, or knowledge of, the conduct strategy. It is critical that the specifi c rules and requirements of that is under investigation. To ensure independent supervision of a jurisdiction be understood in any individual case, but the most the internal investigation and determinations, some companies important categories to consider are: have established special committees of outside directors to over- see and manage the company’s responses and strategies, which Securities regulations and disclosures. Public companies typically are conducted by outside counsel, but often with the have duties of disclosure on the occurrence of certain types general counsel’s input and day-to-day involvement. of events. Learning of and/or resolving a criminal competition investigation by government authorities, as well as Conduct an internal investigation other intermediate developments and determinations, could well trigger disclosure obligations in one or more jurisdic- Whenever a company is faced with an investigation into a cartel tions. Those disclosure requirements may run counter to by the authorities, the fi rst key decision is whether, when and how some jurisdictions’ desire to keep the fact of investigations to launch an internal investigation. Without full knowledge of the completely confi dential. These kinds of confl icts need to facts, the company and its advisers cannot make any rational be resolved with the investigating authorities, and the need choices as to the appropriate defence strategy. This ought to for content and timing of those disclosures is an ongoing seem obvious; however, internal investigations are never popular consideration for any company under investigation. endeavours. If there is an underlying cartel, getting clear statements from employees (whether managers or not) can be diffi cult Shareholder derivative suits . In the US, shareholder deriva- and require multiple interviews, extensive document review and tive suits, alleging breach of fi duciary duty, frequently follow close review of data. The company should plan to deal with differ- a cartel investigation by the authorities. ences between jurisdictions. For example, securing the co-operation or statements of employees in the EU can be challenging as, Corporate governance and accounting rules. Corporate unlike the US, individuals do not have individual criminal expo- governance rules have proliferated in recent years and sure, and their participation in an investigation cannot be com- increasingly need to be considered. They may overlap with pelled. How to approach former employees is another challenge requirements under the securities laws, but have further that must be managed early on. The outcomes of such investiga- requirements relating to special accounting treatment tion can be painful, unexpected and embarrassing, and they can and/or disclosure of fi nes, penalties or civil payments, (even meet with initial resistance, all of which needs to be understood if anticipatory). Large companies will usually also have their and managed by external and internal company lawyers. own code of ethics, which in the event of a cartel infraction, will have been breached.

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However, it is usually impractical for a company to decide against In addition, while leniency rules have proliferated around the conducting an internal investigation (this is especially true for world, they are not co-ordinated or necessarily consistent, so that larger and publicly quoted companies). A failure to investigate multiple leniency applications are likely to be required. Similarly, will deprive the company of any opportunity to benefi t from the the interaction between the US discovery process and investiga- proliferating leniency programmes and it may separately be un- tions occurring in the rest of the world is becoming a signifi cant lawful under governance and securities regulations. For example, issue. The ability of parties to use materials and information pro- for issuers of securities in the US, the Sarbanes-Oxley Act of duced in US civil cases with overseas authorities is currently the 2002 contains far-reaching requirements of reporting and in- subject of litigation in the US, but the legal trend (from the US vestigation where there is “evidence of a material violation of Supreme Court) and the safest assumption for planning purposes, securities law or breach of fi duciary duty or similar violation”. A is that evidence discovered in the US may be used in foreign pro- company’s own rules of corporate governance and ethics will also ceedings and that discovery obtained overseas may at some point have been violated by participation in a cartel, and failure to fol- be discoverable in US courts. As a practical matter, the enforce- low up on the suspicion of a violation risks the appearance that ment agencies have co-operation agreements and will seek waiv- the company’s management condones such violations. ers from companies to permit information and evidence sharing. However, it is still vital to consider the jurisdictional limits of the In addition, there is always the risk of a domino effect within a par- discovery rules, especially in civil proceedings that may follow. ticular industry, where the uncovering of one cartel will lead to the uncovering of other cartels in adjacent markets. Companies should In summary, the simultaneous analysis of all opportunities and anticipate this possibility in the internal investigation. In the US, risks across the various jurisdictions is necessary for a company the Department of Justice routinely asks witnesses the “omnibus to make optimal decisions about the timing and strategy of its

question” (that is, whether they are aware of any other collusive defence. Cross-border conduct) and defi nes co-operation as offering a complete answer to that question. Moreover, the leniency rules encourage such dis- Proceed swiftly closures. Under the practice of the US Department of Justice, the fi rst company to report a violation in a second market will not only Since all leniency programmes place a premium on being in early receive full amnesty for its participation in that cartel, but will also (if not fi rst), the process for assessing the company’s exposure benefi t in relation to the original market, where it may be too late and/or desire to provide materials to the authorities must take to qualify for amnesty (this is called an Amnesty-Plus). There is a place very quickly. Some jurisdictions will permit a company to similar practice operated by the European Commission. “lay down a marker” by admitting participation in a cartel and committing to provide the available evidence as soon as the in- As a practical matter, the question usually is not whether to internal investigation has been completed. vestigate at all, but how to do so. If a dawn raid has occurred or a grand jury subpoena has been received, the investigation must DECIDING ON THE APPROPRIATE STRATEGY begin immediately and start with the materials seized or request- ed by the authorities. The location and individuals responsible for Very soon after completion of the internal investigation, the com- those documents are critical. However, every company and every pany needs to decide which basic strategy it wants to adopt in investigation is unique and any inquiry should be designed care- relation to the one, or more, public enforcement proceedings that fully and with the particular company and facts in mind. it knows are pending or that are likely to be opened. This chapter assumes the most diffi cult case: that the investigation has Deal with confl icts of interest revealed some, but inconclusive evidence of international cartel- like behaviour, and that there is reason to believe that at least one The fact that violations are criminal offences in the US and in participant already has sought amnesty from the authorities. Canada, and increasingly in other jurisdictions such as the UK, can trigger confl icts of interests between the employees and the In making strategic decisions, usually on the basis of incomplete business. In this situation, it is best to consider (and some au- information, the company needs to make predictions as to the thorities will require) whether to have separate representation likely future developments, not only in the various public en- by counsel for individual employees. (Under most jurisdictions forcement proceedings, but also in relation to the likely forum the company can advance and reimburse the employee for the of private suits and the overall relations of the company with the expenses.) This may not be necessary in the EU, however, as public, investors and employees. individuals do not have individual criminal exposure, and their participation in an investigation cannot be compelled. The rela- The three basic options are full denial, full co-operation and tionship between the different outside counsel should be set out measured co-operation. in a Joint Defence Agreement. This will protect to the maximum extent possible the legal privilege over information exchanged be- Full denial tween counsel to the maximum extent possible. The strategy of full denial and complete defence is the oldest Ensure co-ordination across all jurisdictions defensive strategy. For a long time, this was the preferred defence in European proceedings. To some, it was the only acceptable An international cartel will, by defi nition, be alleged to have oper- behaviour for a European business. In the US, the balance of ated in a number of jurisdictions. The defence process must be considerations has always included the level and quality of evi- designed to investigate all illegal activities, wherever they may dence presented, the likelihood of prevailing on the merits, the have been committed. The facts may differ dramatically from ju- risks of civil litigation and damages and the costs of defending risdiction to jurisdiction, or a single cartel may be alleged to have on the merits. In fully denying the allegations in any jurisdiction, operated in multiple jurisdictions. a company would:

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Deny any infringement or agreement in restraint of trade. This strategy is now a more popular route than in the past, and can be more straightforward to implement than a mixed strategy Respond to information requests in a minimalist way. Under ( see below, Strategies in-between ). It is appropriate for a compa- EU and US rules of procedure, the authorities can (and ny that has determined the evidence strongly suggests unlawful most often do) issue compulsory information requests, behaviour that it wishes to put behind it, and move forward with requiring a response even if they are the subject of an a clean slate. If the company has made this determination, the investigation that can result in ﬁ nes being imposed on the considerations that relate to the securities and governance laws, defendant. employment and other laws are usually accommodated easily.

Challenge the scope and/or suffi ciency of the discovery or This strategy can involve a degree of interpretation of even am- investigative process. biguous facts in the most incriminating light, to supplement more defi nitive evidence. This can be a diffi cult and uncomfortable In general, not admit any role in any cartel. exercise, and it is likely to run against the natural interests of some individuals. The same strategy will be employed in private suits, forcing the claimants to prove every single element of their case. The obvious drawback of this strategy is the fact that full admissions can work against the company in a private suit. In order to Today, with effective leniency programmes proliferating, this reduce this risk, the US has recently amended its laws to provide strategy is less likely to succeed if there is strong evidence of a that in addition to obtaining immunity from prosecution, a recipi- cartel. There is a high likelihood that other industry participants ent of amnesty will no longer be jointly and severally liable for have been or will be co-operating with the authorities and provid- treble damages but will be liable only for actual damages (Anti- ing proof of the cartel. In the EU, a denial by one or two compa- trust Criminal Penalty Enhancement and Reform Act of 2004 ). nies will therefore not be effective in fending off the authorities However, a company that does not qualify for amnesty, but still and the company will relinquish any chance of receiving a reduc- pleads guilty in return for reduced sanctions, will continue to be tion of the sanctions. This strategy in the EU is probably worth liable for treble damages and under some circumstances in a considering only if the company was a fringe player in the cartel, US court the guilty plea can constitute prima facie evidence of the evidence against the company is limited and if overall there participation in a cartel. is a chance that the company will escape prosecution. The same Cross-border calculations apply in relation to private suits: claimants might de- The legal situation is somewhat different in Europe, where it is cide not to sue a fringe player that has not admitted to anything. likely that a fi nal European Commission decision imposing a fi ne will make the company’s participation in the cartel binding on na- In the US, however, it can be a harder calculation. Criminal en- tional courts in relation to its participation (Article 16, Regulation forcement is a judicial function, not an administrative proceed- 1/2003 ). This effect will not be fundamentally different whether ing, so that charges must be proven by a prosecutor in a court the company co-operated or not. of law and beyond reasonable doubt, as determined by a jury. Defendants have obtained acquittals even where other purported Strategies in between members of the cartel have entered guilty pleas in accordance with leniency petitions. A decision to deny involvement has to There are, of course, a large number of strategies available that be based on the particular facts of the case and the full range of lie in between the two above extremes. In the face of some evi- commercial considerations. A decision to fi ght a criminal charge dence of an infringement, or evidence that is inconclusive, there can be diffi cult and costly (fi nancially and personally) even where are other possibilities, including fully co-operating with the in- the defendant prevails. vestigation but not admitting wrongdoing, confi ning admissions to the strictest interpretation of the evidence (no incriminating For publicly held companies especially, outright denial of all un- inferences), or admitting to limited aspects of the suspected con- lawful conduct everywhere can be diffi cult where: duct such as:

As a result of the internal investigation there is evidence of The speciﬁ c products affected by the cartel. some infringement, even if the evidence is not as robust as the authorities suspect or allege. The geographic extent of the cartel.

Employees who violated internal policies and/or laws must The duration of the cartel. be reprimanded. The effectiveness (or lack of effectiveness) of the cartel on Full admissions and co-operation the market.

At the other end of the spectrum is the strategy of full admissions The level of a company’s involvement (for example, denying and co-operation. In order to receive amnesty or at least a reduc- participation at group level, in order to contain the enforce- tion of the otherwise applicable sanction, companies can admit ment proceedings at a lower level of the corporate chain). liability to the authorities at an early stage, produce all available evidence, and continue to co-operate with the authorities The nature of the conduct alleged to be unlawful. as required. This type of co-operation increasingly includes an expectation on the part of the authority that key managers, who The existence of internal corporate rules and training of instigated the cartel or at least played a key role, will be ﬁ red or employees on compliance with the competition laws. at least demoted.

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This sort of strategy is appealing for companies that are not eli- Where an internal investigation reveals substantial evidence gible to receive amnesty, because they are not fi rst in the door. of cartel behaviour, it will be very diffi cult for the company However, in the EU and the US, this approach is the least pre- to deny completely any wrongdoing vis-à-vis the authorities dictable or routinely tested through repeated and reported experi- and the public. ences, and it is the approach requiring the most judgment calls. It will involve regular strategic and tactical decisions to handle Where the internal investigation reveals mixed or incon- the particular issues and different procedural phases across dif- clusive evidence of cartel behaviour, the company has a ferent jurisdictions. Importantly, the uncertainty of outcomes as- tougher choice to make as between full admissions and sociated with this approach can be challenging to boards of di- co-operation, and a more circumspect approach. rectors, managers and employees, though it perhaps most readily refl ects the complexity of these situations. These alternatives must be considered in light of the rules and practices of multiple jurisdictions simultaneously. Conclusion – the challenges In spite of these limitations, however, a large number of impor- The range of strategic choices available to publicly quoted com- tant and complex tactical decisions have to be made throughout panies can seem more limited than initially thought: the duration of the various procedures and usually on the basis of incomplete information. The number of jurisdictions involved and Where there is some reason to suspect that a company may the developing nature of the laws, both regarding public enforce- have participated in a cartel, the company very likely will ment proceedings and civil damage claims, make this a challeng- need to conduct an internal investigation to uncover as ing (and evolving) task. much as possible of the company’s involvement. Cross-border

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